Exploring the relation between interest rate and stock market indices - an ARDL approach

The relation between interest rate and stock market is always a matter to be explored as outcome ranges between positive and negative even few studies supported no relation. These variations in results motivate the researchers to re-investigate the relation between both the variables. For the analysis, same daily data of interest rate and stock market indices (Sensex) is converted in to weekly, monthly and quarterly from April 2011 to March 2016. Database of interest rate and stock market indices is collected from the web portal of Reserve Bank of India and Bombay Stock Exchange. This paper uses unit root test followed by ARDL bound test to characterise the dynamics of stock market indices to interest rate shocks. Results support the negative relation between both the variables for daily, weekly, monthly and quarterly data during long-run and short-run expect quarterly data where a short-run positive relation exists.